Bionic Turtle’s Week in Risk (ending January 20th)

Welcome to our Week in Risk blog! David recorded two new YouTube videos discussing the binomial tree option price: American-style and Foreign exchange exposure for the unhedged balance sheet. You can test your FRM knowledge with our newest daily practice questions also! Our most recent practice questions discuss swap rates versus spot rates and big data techniques including machine learning. We hope you have a great week!

New YouTube

• Binomial tree option price: American-style (FRM T4-8) https://trtl.bz/2T4APgd

• Foreign exchange exposure for the unhedged balance sheet (FRM T3-48) https://trtl.bz/2FMV3Hp

New Practice Questions

• P1.T4.902. Swap rates versus spot rates (Tuckman Ch. 2) https://trtl.bz/2FC5QVv

• P2.T9.902. Big data techniques including machine learning (Varian) https://trtl.bz/2FCMwrd

In the Forum

• [P1.T1] Sample interview questions about the capital asset pricing model (CAPM)  https://trtl.bz/2FENm6Z
• [P1.T2] Diebold EOC questions are not exam representative https://trtl.bz/2FDDXN2
• [P1.T2] In most case, the null hypothesis can be deduced from a minimum setup (a key tip is that the null must contain the equality!)  https://trtl.bz/2FE1CfZ

• [P1.T2] You definitely need to know how to get the hedged portfolio variance https://trtl.bz/2FEOYh3
• [P1.T3] Hull’s define benefit pension calculation and unearned premiums are a function of the revenue recognition policy  https://trtl.bz/2FuPWeM
• [P1.T3] Thank you abhinavkhanna for pointing out that mutual fund NAV is net of liabilities  https://trtl.bz/2FE1Kwb
• [P2.T5] Backtest confidence is different than VaR confidence https://trtl.bz/2FCdKOM

• [P2.T5] In a value at risk (Var) backtest, the sample failure rate is an unbiased estimator  https://trtl.bz/2FvsPAI
• [P2.T5] When an alternative swap duration is not really different than our approach  https://trtl.bz/2FEi9AW
• [P2.T7] Hull’s EOC Question 15.6 on capital requirements for derivatives under original Basel  https://trtl.bz/2FCZSE2

Risk

• World Economic Forum’s (WEF) Global Risks Report 2019 https://www.weforum.org/reports/the-global-risks-report-2019 Visual Capitalist with highlights https://www.visualcapitalist.com/top-global-risks-2019/

• [GARP] Strategic Risk Will Be Front and Center in 2019 https://trtl.bz/2FDR3JY
• [GARP] Term Versions of Libor-Replacement Rates Pick Up Steam https://trtl.bz/2FDJAus
• Here’s Why Libor’s End Is a Headache for Switzerland https://trtl.bz/2FR9ri1 “Swiss franc-Libor rates underpin about $6.5 trillion of financial products and are used to price about 80% Swiss banks’ loans.“
• Allianz Risk Barometer 2019 https://trtl.bz/2FAagMA “Cyber risk is now a core concern for businesses in 2019 and beyond …“

Banking and Regulatory

• [BIS] Minimum capital requirements for market risk https://www.bis.org/bcbs/publ/d457.htm “At its meeting in Basel on Monday 14 January 2019, the Basel Committee’s oversight body … endorsed a set of revisions to the market risk framework.” Please note this comes with a 25-page explanatory note  https://www.bis.org/bcbs/publ/d457_note.pdf

• [BIS] Basel Committee completes review of Principles for sound liquidity risk management and supervision   https://www.bis.org/press/p190117.htm
• [GARP] Regulators Signal Readiness for Artificial Intelligence (AI) in AML https://trtl.bz/2FDhbVg
• OCEI Examination Priorities for 2019 https://corpgov.law.harvard.edu/2019/01/20/ocei-examination-priorities-for-2019/

Quant, code and cyber

• Detecting Credit Card Fraud Using Machine Learning (Catching Bad Guys with Data Science)  https://trtl.bz/2FOCbYz This is exactly one of Bart van Liebergen’s ML use cases (i.e., fraud) in the FRM P2.T9 assigned reading (Machine Learning: A Revolution in Risk Management and Compliance?)
• An intuitive guide to Gaussian processes https://trtl.bz/2FDOUhl

• Curse of Dimensionality https://towardsdatascience.com/curse-of-dimensionality-2092410f3d27
• ROC Curves https://rviews.rstudio.com/2019/01/17/roc-curves/
• A Gentle Introduction to Exploratory Data Analysis (Includes: pretty drawings, a walkthrough Kaggle example and many a challenge)  https://trtl.bz/2FHvJUb

• Making intelligent decisions that consider cyber risk (Norman Marks) https://trtl.bz/2FNHaZp, and Hyperventilating about cyber – Part I  https://trtl.bz/2DndNvF

Case studies

• Wells Fargo: Repairing a Damaged Brand (ft.com) https://trtl.bz/2FOgrMg (or pdf here  https://trtl.bz/2MkdMLC): “dozens describe a damaged brand, a workforce held back by fear of repeating past mistakes, and the immense difficulty of drawing a line under one of the ugliest banking scandals in an era full of them … A strong culture of credit risk management was matched by precious little culture of operational risk management.“

• How Much Value Was Destroyed by the Lehman Bankruptcy? (NY Fed) https://trtl.bz/2FKYNt4 Matt Levine commentary  https://trtl.bz/2FS5tpp
• BNP Loses $80 Million on S&P 500-Linked Derivative Trades https://trtl.bz/2FDO4RJ
• 9 Black Swan Events that changed the Financial World https://trtl.bz/2FF1SLI

Investing

• O’Shaughnessy Quarterly Investor Letter Q4 2018 https://www.osam.com/Commentary/osam-quarterly-investor-letter-q4-2018 If you’d like to see Ang’s factor theory in action, here is a thought leader

• 10 Tips for 10-Ks and Proxy Statement https://corpgov.law.harvard.edu/2019/01/20/10-tips-for-10-ks-and-proxy-statement/
• Agency MBS: Time to Rethink Prepayments (PIMCO) https://trtl.bz/2FNKBPZ

Other

• US Government Shutdown: Key Risk and Insurance Considerations (Marsh, pdf)  https://trtl.bz/2T3osAX
• The mortgage industry isn’t ready for a foreclosure crisis created by climate change  https://trtl.bz/2FEopZs